Formidable George

April 2012 by Jonathan Owen

George Osborne is having a rough time steering the UK economy through the worst economic crisis for 60 years. But he finally managed a smile last week when the charming Christine Lagarde – newly-appointed head of the International Monetary Fund – put a friendly arm round his shoulders and told him how wonderful he was: ‘Formidable, Monsieur Le George’.

His problems started with the Easter budget. First there was outrage at the new ‘Granny tax’ and restrictions on charitable donations, then ‘Pastygate’ and a threatened petrol tanker strike, no rain and a hosepipe ban. All good Daily Mail-type issues for backbenchers to moan about and an unwelcome diversion from his real dilemma – whether to contribute another £10 billion to boost the IMF and by implication support the Euro.

Extra lending will leave Britain with a total liability of nearly £40 billion to the IMF in addition to the billions already lent to Ireland and Greece.

In the end he did the right thing and made Christine very very ‘appy by supporting the IMF and Britain’s largest trading partner, the Eurozone. But he did it on his terms: ‘We’re very clear our money comes with conditions – it’s a loan with interest and gets paid back’ he said. ‘A Chancellor who takes his job seriously must engage with the issues and ensure Britain plays its part in sorting out problems that have a direct impact on the British economy’. A very grown-up attitude and stuff the backbenches – but one that placed him under more pressure than ever to grow the domestic economy and it’s tax base out of the problem. The extra lending will leave Britain with a total liability of nearly £40 billion to the IMF in addition to the billions already lent to Ireland and Greece.

Plenty of OAP’s, charities and retailers would say the Easter budget was not a good start. Greggs Bakers protested about tax changes which will impose Vat on their sales ‘according to the temperature of baked products when sold’. They currently charge Vat on 20% of their sales – hot sandwiches, breakfast rolls, soup, coffee and cakes – but new Vat rules on hot food mean from October this will rise to 53%. Passing charges like that onto customers is bad for turnover and bad for profits.

So will this affect Markets? In a word, Yes. I’m told by my tame Vat inspector that Stallholders are already supposed to charge Vat on food sales whether hot or cold if they provide seating or customers chug it down at a communal seating area provided by management. But if they genuinely take hot food home then it seems from October it will now be Vattable. Rotisseries selling ‘hot chicken in a bag,’ gammon chunks and ribs etc for takeaway will be affected as will the hot food counters in Supermarkets.

This all seems pretty clear but any legislation is open to challenge. The issue of which foods sold on a Market are Vattable is already pretty unclear, so imposing new rules has the potential to create even more fun.

HM Treasury have ignored the commonsense approach which suggests you can’t legislate for every possibility and tried to define hot food which attracts Vat as ‘above ambient air temperature’. If you run a rotisserie then be prepared for a Vat-inspector to wander in and stick a thermometer up your chickens’ backside. If he visits on a blazing hot summers day then you can argue you’re only obliged to charge Vat in the winter.

The UK Vat system is a mess.

The fundamental problem is the UK Vat system is a mess. There are arbitrary exemptions all over the place. In recent years this led to absurd legal battles over whether Pringles are crisps (No, they’re a potato snack and therefore Vat-liable) and whether Jaffa Cakes are cakes (Yes they are, so Vat-exempt, unlike luxury biscuits). Such cases confirm that no-one apart from the courts can explain what is Vattable and what isn’t.

Our system is one of the most complicated in Europe and that exemptions of £30 billion per annum could be handed back to consumers in tax cuts to stimulate the economy.

A recent report from the think-tank Reform showed how inefficient the UK’s zero Vat and reduced Vat rates are. It showed that our system is one of the most complicated in Europe and that exemptions of £30 billion per annum could be handed back to consumers in tax cuts to stimulate the economy. Countries like Australia and New Zealand have already taken that line and abolished exemptions whilst introducing a much simpler-to-administer Goods and Service Tax on everything BUT (and this is the clever bit) they linked it to a reduction in the percentage rate of GST and the rate of personal income tax. If this was done in the UK then all we need to do is harmonise our tax system with all other EU countries and make a lot of Vat inspectors redundant. Simples.

Meanwhile another enormous revenue-producer for HM Treasury may be scrutinised by the Office of Fair Trading. There are renewed calls from independent garages through the Retail Motor Industry Federation for a formal investigation into the retail fuel market. Evidence from members suggests some supermarkets are in cahoots with suppliers and indulging in unfair and predatory pricing policies. This is set against the background of filling station numbers falling from 40,000 in 1966 to 8,480 today with some 300 independents closing each year. In the meantime the market share of fuel sold by Supermarkets has risen to 46%. Maybe the OFT will mount an inquiry but petrol tanker drivers union reps. were quick to see the pay leverage they have now that so few filling stations exist.

What with no rain, no pasties and no petrol this looks like really bad news for the traditional English summer. I blame the French.